Discuss the relationship between rationality of investors and the market efficiency.

Discuss the relationship between rationality of investors and the market efficiency. Essay example
Undergraduate
Essay
Finance & Accounting
Pages 6 (1506 words)
Download 0
Name: Tutor: Course: Date: University: The Relationship between Rationality of Investors and Market Efficiency Introduction The relationship between market efficiency and rationality of investors is a topic of intense debate among various academicians such as economists, financial professionals and investors…

Introduction

33). In 1950’s, Simon set out to develop a fresh model to describe the resolution making processes. Simon postulates that well-meaning investors undertake rational choices under various constraints. These constraints create boundaries in which rational resolutions can be taken; these draw into question the postulations of rational selection in the utility curve (Livanas, 2004, p. 3). In 1960’s, Eugene Fama developed the Efficient Market Hypothesis; Fama argued that in an active market, which includes various intelligent and knowledgeable, securities will be aptly priced and replicate all available information (Fama, 1995, p. 2). This paper seeks to examine the relationship between market efficiency and rationality of investors based on these theories. Investment Decisions Researchers argue that investors make investment decisions under various constraints. These constraints can be exterior to the investor or arise from the predispositions intrinsic in the investor’s knowledge and reference point. ...
Download paper
Not exactly what you need?

Related papers

Stock market efficiency
profits over and above the profits made by the other players in the market by using this information. The hypothesis deals with two of the fundamental questions in finance. The first of them is why there is price change in the market for securities while the second considers how the change actually occurs. Investors involve themselves in identifying the securities that are expected to witness an…
Stock Market Efficiency
One of the most famous and talked about theories in this regard is of Efficient Market Hypothesis. Because information is available to all the investors who are currently in the stock market therefore everyone would be able to predict the price of the stock and how these prices would vary in future as well. As everyone will be having information therefore there would be no advantage to any…
Market analysis for private investors
In 2009, the equity investment fell miserably forcing a number of investors undergoing a great loss in their investment. Nonetheless, the performance of the equity investment began to pick from late in the year 2009 to 2010. The performance of the equity investment kept on rising steadily to its peak in 2011. This was a relief to most investors considering most of them underwent a massive loss…
Efficiency of Foreign Exchange Market
In efficient markets, there are opportunities neither for the hedgers nor for the speculators to make super-normal profits (Fama, 1970). In such a situation, speculative efficiency and arbitraging efficiency exist. The speculative efficiency hypothesis is the proposition that says if there is speculative efficiency in the market, the expected rate of return to due speculation in the forward…
Market efficiency
There are various forms or degrees of market efficiency which exists. These comprise of strong market efficiency, semi-strong market efficiency and the weak form market efficiency (Ho & Yi, 2004; p. 57). Acknowledging the efficient market hypothesis in its simplest and purest form might be hard; nevertheless there are three main types of efficient market hypothesis which have the purpose of…
BEHAVIOURAL FINANCE AND MARKET EFFICIENCY
Due to the presence of inefficiency within the global market, the sales and profitability of a company is not only affected but also the country’s ability to build a more reliable capital asset. Therefore, in response to poor market efficiency, the study on behavioural finance has gained importance back in 1990s2. Using knowledge on behavioural finance, the main causes and underlying drivers of…
Critically review and discuss the concept of market efficiency and empirical approaches to test for it.
The aim of this paper is to develop critical review of the concept of the efficient market hypothesis. The paper is developed in the following sections: Section I: This section covers the concept definition, historical development, assumptions and the types of the EMH. All these aspects alongside determine the associated criticisms. Section II: Critical review of the approaches to test the EMH.…